Rank: 6 of 133

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Narrative Report on Luxembourg

PART 1: NARRATIVE REPORT Rank: 6 of 133

Overview and background How Secretive? The Grand Duchy of Luxembourg is ranked sixth in the 2020 Financial 55 Secrecy Index, based on a moderate secrecy score of 55 and a very large share of the market for offshore financial services, at over 12 per cent of the global total. Its position is largely unchanged since our 2015 and oderatey 0 to 25 2018 index. secretive

Sandwiched between Germany, France and Belgium at the heart of Europe, this tiny constitutional monarchy has a population of just over six hundred thousand, allowing its enormous financial sector to achieve 25 to 50 a strong degree of ‘capture’ over the political system, media and culture of the entire Grand Duchy. Criticism of the sector, and discussion about its relationship to society, used to be exceedingly rare up until the LuxLeaks revelations in 2014, which helped to open up a wider public debate. 50 to 75

As in Switzerland and many other tax havens, the offshore financial sector has been underpinned by a history of political stability. This is bolstered by Luxembourg’s position at the geographical heart of Exceptionally secretive 75 to 100 Europe, catering largely to its immediate neighbours – and also its role as a founder member of the European Union.1 This latter factor has provided Luxembourg privileged access to the European market that other offshore centres cannot match; and Luxembourg also enjoys considerable political support from European economic élites who How big? 12.36% benefit from its offshore services. These factors have often protected it against being blacklisted or pressured to change.

Until recently we were calling Luxembourg the “Death Star” of financial uge secrecy in Europe, due to its highly aggressive stance in fighting European transparency initiatives. Since 2013, however, Luxembourg has joined various international transparency initiatives and made significant improvements in its financial transparency. We attribute this relative change of heart above all to the evolving international arge climate on transparency, combined with high-profile global scandals that have cast the tax haven in a highly negative light. These changes also coincide with the departure of Prime Minister Jean-Claude Juncker, sma arguably the most important architect of the secretive modern tax haven. However, the tax haven was always nurtured and promoted by

an élite consensus that goes far beyond Juncker, underlining the fact huge: >5% large: >1% to 5% small: >0.1% to 1% tiny <0.1% that external pressures are the core driver of change. Luxembourg accounts for 12.36 per cent of the global market for offshore financial services. This Despite these improvements, Luxembourg remains one of the world’s makes it a huge player compared to other secrecy most important secrecy jurisdictions, hosting a range of financial and jurisdictions. other activities that foster illegality or abuses elsewhere – including a high-security ‘freeport’ warehouse to store assets such as paintings, gold The ranking is based on a combination of its bars or bearer bonds, with ample opportunity for financial mischief.2 secrecy score and scale weighting. Full data is available here: http://www. A new unregulated investment fund for ‘well-informed’ investors financialsecrecyindex.com/database. (Reserved Alternative Investment Fund, or RAIF)3 has recently been To find out more about the Financial Secrecy launched which can be used to hold ‘tangible’ assets such as art or to Index, please visit 4 run hedge funds that are not subject to regulatory approval. Financial http://www.financialsecrecyindex.com. secrecy is based significantly on the privileged nature of professional The FSI project has received funding from the lawyer-client relationships, rather than classic Swiss-styled banking European Union’s Horizon 2020 research and secrecy. For instance, investors can hide behind Luxembourg companies innovation programme under grant agreement No 727145. © Tax Justice Network 2020 If you have any feedback or comments on this report, contact us at [email protected] 1 Luxembourg

whose officers are bound by these relationships not remains a centre of lax financial regulation, which to divulge details of who owns them. The Panama potentially poses global financial stability risks. Papers mentioned 400+ financial intermediaries in New initiatives to diversify the economy into the Luxembourg.5 information age,12 develop itself as a centre for green and ‘climate finance’13 and the exploitation of ‘Family offices’ manage private wealth across the outer space resources (yes, really) have yet to prove generations, and since 2007 a specific entity has themselves.14 been available for private wealth management, 1 the ‘family wealth management company’, which More broadly, Luxembourg is also one of the world’s is a passive investment vehicle for the acquisition, most important – and growing - offshore financial holding or sale of assets.6 As Deloitte Luxembourg centres, and its offerings go far beyond the provision Luxembourg,points out to its clients, it is free of all taxes a (except prime of secrecy – though domicile most of these sectors depend a minuscule subscription tax) and there is ‘no access quite heavily on offering regulatory escape from to tax treaties and European directives’.7 other countries’ rules. Luxembourg is the most for hedge funds important private banking and wealth management Luxembourg is the second largest home of funds centre in the Eurozone, with 143 banks holding after the US.8 A fund, if used by an individual or nearly 800 billion euros in assets,15 providing family, can potentially act as a wrapper to protect liquidity to their mostly foreign owners. Of these The Luxembourgagainst being identified as theWith beneficial more than owner 14,000assets, funds 350 billion is fiscalin the secretivestability privatehas attracted banking of the underlying assets and theand income about they USD 3,700sector bn of (up from 300hedge billion fund when managers we published from all Alternativeproduce. For Fund example, if a fund is incorporated as a 16 assets under managementthe 2015 as FSI),at andover more the thanworld. half As ofof privateJune 2015 Industry...company and opens a bank account, under current banking assets are owned by ‘ultra high net worth insufficient beneficial ownership identificationthe end of 2015, rules Luxembourgindividuals’ holdingis 15.6%over 20m of eurosglobal each. alternative It is the 1st Globalthe bank investment collects ownership informationthe second - used largestfor investmentworld’s second largestinvestment investment funds fund centre and 45% after automatic tax information exchange with other the United States17 – and fund management, with fund centre in Europe and fund centre in the world after of alternative UCITS were countries under the new OECD Commonthe United Reporting States andassets the under fastest management domiciled worth in nearly Luxembourg. 3.8 trillion worldStandard fastest – based growing on a 25% ownership threshold. If euros,18 is the most important part of the financial nobody holds that much, which is simplegrowing to arrange, alternative investment alternative domicile centre. Fanny Sergent, PwC Luxembourg then they may not be identified andfunds the information domicile. Hedge Fund Leader, January is not exchanged. Luxembourg also has a long history in hosting The legal and regulatoryinternational bonds;2016 it is a big player in insurance Luxembourg takes secrecy seriously:framework breaking that hasand been reinsurance; and in structured finance and professional secrecy can result in a prisoncreated sentence. over 9the years,securitisation vehicles. It is the world’s third largest 19 In January 2018 a welcome turn combined of events sawwith Luxembourg’scentre for the domicile of hedge funds, after the Antoine Deltour, one of the two the whistleblowers, Caymans and Delaware, and is growing fast at their who exposed the so-called “Luxleaks”longstanding scandal, economicexpense, and as this graph shows.20 have his conviction overturned while the conviction against his fellow whistleblower, Raphael Halet was upheld.10 More recently, the outgoing President of the Evolution of the worldwide share of hedge funds by domicile Luxembourg Bar cautioned that 45% the proposed transposition of the 2011 2012 2013 2014 Jun-15 th 6 EU Directive on Administrative 40% Cooperation (DAC6) was going too far by forcing tax lawyers to 35% 33.0% break their professional secrecy by 30% 26.7% forcing them to disclose abusive 24.8% 25% 11 22.8% tax avoidance constructs. 21.1% 20.8% 20% While Luxembourg has taken 15.6% 15% 12.7% action to improve its previously 10% 7.8% poor track record on providing 5.6% 6% offshore secrecy, it has continued 5% 3.2% to expand its role providing 0% letterbox companies to help Caymans Delaware BVI Ireland Luxembourg Others multinational corporations avoid paying tax in other countries. It Source: HFR

4 . PwC Luxembourg uxembourg ECFIN CountryL Focus Issue 9 | December 2013 domestic clients' banking needs. During the Chart 2: Banks' country of origin 2008 financial crisis Luxembourg Only 5 out of participated in capital injections for ING, 141 banks are Fortis and Dexia because they were systemically considered systemically relevant. These relevant.Outside the traditionally-defined financial sector formally abandoning political neutrality and joining it also runs abanks lucrative were recapitalised line in hosting with the holdinghelp of NATO after the Second World War. companies ofFrance, transnational Belgium, corporations,the Netherlands and and facilitating theLuxembourg. setting up ofEach structures bank's – bailnotably-out its was The discovery of large iron ore deposits and the now infamous different‘tax rulings’ in – nature.to help themThe avoidthree andcountry's emergence of a strong iron and steel industry in evade tax. It iscontribution strenuously wasseeking commensurate to build up anto the the early years of the 20th Century, bolstered by industry basedrespective on Islamic bank finance's importance and despite itsin the policies that insisted on transforming the ore locally,

historically Europeanrespective (particularly domestic economy German), whichfocus,21 is also underpinned an era of rapid growth. Luxembourg reflected in the ownership structures. participatedit is in actively courting offshore financial players in Asia, notablyAccording China. Luxembourgto the bankers' claims toassociation be , Its history as a financial centre stems from three recapitalising ABBL, the number of bank employees three thebanks second in largest domicile for investment funds factors: first, tax-free and secrecy facilities for non- 2008. diminished by 3.1% in the 15 months after resident corporations, dating from 1929; second, investing into mainland China, after Hong Kong (see Source: Commission de la Surveillance du Secteur 22 Lehman's bankruptcy (ABBL 2009, p. 38) p16 here). Despite being landlocked, Luxembourg theF inancier emergence (CSSF of 5/2013) offshore Eurobond activity in even has an offshorebut increasedshipping ever registry since.. 23 the early 1960s, particularly involving German Luxembourg banks wanting to take advantage of almost non- has a Thehuge graph below,Luxembourg's based on 141 end-2012 banks' balance data from sheet total atexistent end-2012 banking amounted regulation to EUR 734 in billion, Luxembourg; more than and bankingthe sector European 18Commission, times its GDP shows. By the end extreme-2011 that size ratio in Cyprus,third, banking Malta, andsecrecy Ireland which stood was close de tofacto seven in timesplace but a ratherof bank assetsGDP. relative Icelandic to thebanks' economy assets reached – another nine timesfrom GDP the beforeoutset, their but meltdowndecisively instrengthened September 200 and8 small domestic (Chart 3). In Luxembourg24 domestic banks representsolidified only 150with % the of 1981GDP. Banking Act.28 bankingpointer to financial ‘capture.’ industry. Chart 3: Banks' assets in percent of GDP in international perspective

Sources: ECB, Central Bank Iceland, Ameco

Credit institutions display healthy soundness indicators in aggregate. Non-performing loans are less History of Luxembourg’sthan 0.5% ofoffshore total loans. financial With an centre average coreLuxembourg tier 1 capital ratiohas ofsought 15.3% toat endcreate-December and 2012,tailor banks are already fit for Basel III, as very few specificbanks in thelegislation Grand Duchy in usesector capital after hybrids sector, which through Although Luxembourg currently rivals Switzerland a “light-touch” regulation, low or no-tax, rather will see their eligibility phased out until 2019. This ratio increases to 16.6% if only domestic banks in size and scopeare astaken a European into consideration. secrecy jurisdiction, Return on equity secretivestood at 7.5% ‘offshore’ in December model, 2012 with and a returnhistorically on assets large Banksthe display origins of its financial sector are far younger. emphasis on “keeping assets based in Luxembourg healthy at 0.5%. Luxembourg also hosts many private banks. Fiduciary services and trustees play an soundness important role as well and most private banks secretalso run from operations national in Luxembourg. tax authorities,” Nonetheless, as the a top 29 indicators.There is somerelative dispute importance as to when of this Luxembourg sector is evolving asLuxembourg front office regulatorduties are explainedshifted to .metropolitan Its high ranking areas emerged as a nation: it has been an autonomous on the Heritage Foundation’s index for “investment where their wealthyth clients reside, whereas the bulk of back office work remains in the Grand political unitDuchy. since the 10 Century and a long freedom” is testament to this lax approach

history of being a Duchy, owned over the centuries (although interestingly it has slipped from first by successive EuropeanWhy does powers. Luxembourg The ancient Saxon host soplace many to sixth foreign since our 2015banks? FSI, possibly due to the 30 name of its capitalMost foreign city Lucilinburhuc banks have negligible was “Little links withchanges the resident detailed economy below), as they which engage goes only a long in fundway Many foreign Fortress”, symbolisingadministration its strategic, private positionbanking, or astride act as a conduittowards for lending explaining abroad. why Luxembourg has become so banksmajor use military (and trading) routes linking Germanic important in global investment funds today. Luxembourgand Frankishas The territories. country hosts Interestingly, many private historical banks as it is still perceived as an attractive location for wealth a conduittrading for ‘nodes’management have often. Even ended though transparencyup as secrecy on financialIn an assets effort has to been diversify increasing the through economy several awayEU- from lending to led initiatives, private individuals25 may still prefer to keep their declared assets in the Grand Duchy, other jurisdictions, as our reports on Singapore, Hong overreliance on the financial sector, the government 26 attracted27 by a legal framework which permits the creation of tailor-made vehicles for private wealth jurisdictionKongs,. and Dubai attest. Independence was has launched a study and broad consultation process management. On the other hand, a worldwide trend to have private bankers work where31 the high net formally ratified in 1867, but even then it remained on the “Third Industrial Revolution”, alongside 32 a possession ofworth the individualsKings of Netherlands actually live and and only not where theirits “Digital money is Lëtzebuerg” invested led strategyto a relative for decline investment of the private banking sector in the Grand Duchy. slowly did it gain true independence, eventually in ICT infrastructure, as well as digital innovation 3

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and skills. While some of the endeavours, like the boom years, gives a flavour of those times: new-fangled Space Resources33 initiative, look truly innovative on the surface, worries remain, however, “We were dealing with those ‘Belgian that the underlying motivation remains the same dentists’ who keep bonds under the as with past secrecy jurisdiction: the exploitation of mattresses,” Krall remembers. “Sometimes Luxembourg’s most valuable resource, i.e. national they all came in at once – what we called sovereignty, for financial gain.34 the coupon bus would arrive [or, as some called it, the train des fraudeurs]. They came Offshore: early beginnings from Belgium, Germany, the Netherlands, filling the lobby, spilling out the door, Luxembourg’s first real steps as an offshore financial getting angry, waving their coupons and centre began in 1929 with a new legal regime for getting their cheques.’ The vaults held, companies, under which transnational corporations among other things, enveloppes scellées could establish ‘holding company’ subsidiaries in (sealed envelopes) relating to ‘Henwees’ – Luxembourg, set up purely to own assets elsewhere, HNWIs or high net worth individuals. ‘We that would be exempt from income and capital didn’t know what the hell was in there,’ she gains tax. European companies quickly realised said. ‘The private bankers and relationship that the considerable secrecy surrounding these managers put those things in there – we Luxembourg subsidiaries provided a convenient never had an inkling.” (Treasure Islands space for evading taxes due elsewhere. This was p216) classic ‘offshore tax haven’ activity. The launch of the Eurobond markets (and the wider However, for many years this sector made a “Euromarkets”, 38 which included currencies too) relatively modest contribution to Luxembourg marked a new era in the globalisation of finance GDP; it was only in the 1960s that the Luxembourg that would within a few years break apart the high- financial sector began to take off. The big milestone growth “golden age” Bretton Woods era and replace – a top Luxembourg financier suggested this was it with a new era of rapid financial expansion: an Luxembourg’s financial “Big Bang” – was the era also marked by greater volatility and frequent launch in July 1963 of the world’s first ever offshore economic crises, mushrooming debt, lower growth Eurobond, for the Italian motorways company and rising inequality. Autostrade.35 Until then, under the constraints of the Bretton Woods architecture which heavily restricted The Euromarkets got a large boost in 1965 when cross-border financial activities, bonds were largely U.S. President Johnson,39 worried about Vietnam- domestic affairs: French investors would raise funds era deficits, tried to restrain U.S. companies from for French companies in French Francs, for example. sending capital abroad to invest overseas: in response, U.S. corporate giants started seeking Though the nuts and bolts of the Autostrade deal ever more funding from Euromarket centres such itself were mostly hammered together in the City as Luxembourg for their non-U.S. investments. of London, the bond offering was listed on the As European and U.S. corporates began to notice Luxembourg stock exchange, at the suggestion of Luxembourg’s laissez-faire, see-no-evil approach to Edmond Israel, the deputy to City banker Siegmund corporate business, bankers from these countries Warburg. Luxembourg was chosen not just for its rapidly followed. Parallel to the Eurobond markets, position in Europe but also for its lack of financial Luxembourg widened its spectrum of activities to sector regulations: there were, for example no private banking and investment funds in particular, stamp duties;36 no withholding taxes, and the bond and kept expanding into new sectors with specific issue did not even require a prospectus.37 pieces of legislation designed to tempt the world’s hot money. The bond offering was a financial success and many others followed rapidly: by year’s end 1963 there Less dramatically, the business of setting up secretive were already 93 bonds listed in Luxembourg (and letter box companies in Luxembourg for foreign four decades later, that figure had grown to about individuals and multinationals was quietly gathering 20,000.) Eurobonds were bearer bonds: classic pace. As early as 1973 France and Germany tax evasion and secrecy instruments because no demanded a crackdown on these, but Luxembourg’s withholding tax was charged: and whoever physically role as a European Union founder and member held them in their hands was entitled to the income enabled it to lobby to head off any action. and capital. Beth Krall, a banker who worked in a Luxembourg bank’s back office in the Eurodollar The collapse of Luxembourg iron ore mining from

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the 1970s – the last iron mine closed in 1981, by under Blackfriars Bridge in London. The tale, which which time the steel industry was a shadow of its involved allegations about the Italian Mafia, the former self – saw policy makers increasingly seeking Vatican, secret services and Masonic lodges, was to bolster the financial sector, which by 1981 was never satisfactorily unravelled. Luxembourg’s role already the dominant contributor to GDP,40 rapidly in supplying the financial secrecy that enabled dwarfing all other sectors. The Banking Act of 1981 large-scale loans to mysterious entities was rarely for the first time legally bound bankers to keep their mentioned, other than in passing. client information secret, formalising practices that had long been in place. Later, the Bank of Credit and Commerce International (BCCI), widely regarded as the most Luxembourg’s small size and incestuously connected criminal bank in history, incorporated itself jointly élites have enabled the offshore financial sector in Luxembourg and Cayman, with headquarters to achieve and maintain a remarkable degree of in London. Each financial centre provided the tax- ‘political capture’. This capture explains why major free status and required lack of scrutiny – and this political decisions relating to financial services can structure allowed each to point at the others when be taken quickly and with little or no democratic scandal hit. This model allowed BCCI to involve consultation or kerfuffle – ideal for the tumultuous itself in the financing of terrorism, drugs smuggling, and rapidly expanding offshore sector in a period of slavery, trafficking in nuclear materials, tax evasion, intense race-to-the-bottom dynamics. Already well fraud, racketeering and much more, with – at least embedded, the offshore model had become the until Robert Morgenthau and (TJN Senior Adviser) unopposed centrepiece of national development Jack Blum began probing its U.S. activities in the late strategy. 1980s-- no questions asked.44

Laxity is followed by… criminal activity Luxembourg has also played a role in numerous European political scandals: for instance the giant Luxembourg’s regulatory laxity, tolerance of “Elf Affair” that saw the international operations secrecy and tax-free benefits attracted large-scale of France’s Elf Aquitaine serve as a giant slush fund criminality, of course. Much of this has undoubtedly for the use of all major French political parties and been hidden from view by the secrecy, but many intelligence services that became so extensive and important cases have come to light. corrupt that they destabilised the French state.45 As the former head of Elf testified in court, by the 1990s One of the earliest concerned the global fraudster the French intelligence services were so intertwined Bernie Cornfield, who established his first mutual with this system that they had become, in his words fund in Luxembourg in 1962.41 It was aimed (p252),46 “a great brothel, where nobody knows any specifically at tax-evading people around the world. more who is doing what.” Luxembourg, along with As Tom Naylor put it (p19):42 Switzerland and a few other mostly European tax havens, was a central node in the network of secret “When Bernie Cornfeld, the architect of dirty money. the world’s largest and most successful offshore mutual fund, bought his first The role of Luxembourg in the more recent “Karachi airplane, the joke went around his Investors affair,” implicating such top French officials as Overseas Services (IOS) that he was about Nicolas Sarkozy and Edouard Balladur, is testament to start “Capital Flight Airlines.” It was to the Grand Duchy’s ongoing involvement in French only partly apocryphal. If Bernie Cornfeld corruption at the highest levels of state.47 Various did not invent the modern technology of other links to potentially destabilising European capital flight, he did far more than most political scandals – including amajor emerging Mafia of his contemporaries to put it to work in scandal in Italy48 – all add up to further evidence of an imaginative, systematic and profitable Luxembourg’s hellraising role in European politics way.” and economics.

Cornfeld’s empire collapsed in the 1970s. Overall, these scandals led to Luxembourg switching tack somewhat in the 1990s, along with the Cayman The default in 1982 of Luxembourg-registered Banco Islands and other jurisdictions, by effectively 43 Ambrosiano Holdings S.A., one of the largest bank choosing to move upmarket. Sordid drug-dealing failures in Europe’s recent history, was at the core profits would henceforth be frowned upon; now it of another global scandal that erupted into world would be high finance: asset management, shadow media with “God’s Banker” Roberto Calvi hanging banking and the like. These, of course, all carry their

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own risks, including infestation by criminal actors current ruling coalition, headed by Prime Minister (not least tax evaders and avoiders, market riggers, Xavier Bettel, seems no less friendly to the financial Ponzi scheme operators, and so on) as subsequent sector than previous ones, though its leading figures years would show. have made a number of high profile statements to distance themselves from Luxembourg’s murky Nevertheless, scandals have continued to emerge. past. In March 2010, for instance, newspapers reported that Luxembourg hosted US$4 billion in assets for But the ‘capture’ extends far beyond politics. Mike North Korean leader Kim Jong-Il, which were shifted Mathias, a Green Party politician and former head there after Swiss banks tightened up procedures. As of the Cercle de Coopération, stated in 2014: the Telegraph newspaper reported: “The financial sector weighs on people’s “Mr Kim’s operatives then withdrew the minds, and they defend it without thinking money - in cash, in order not to leave a [...] it’s very clear in every day talk: what paper trail - and transferred it to banks is good for the financial sector is good in Luxembourg. The money is the profits for the country [...] Very few people dare from impoverished North Korea selling its to raise their voice to criticise the impact nuclear and missile technology, dealing of this policy on the country. There is no in narcotics, insurance fraud, the use of political courage to face up to the heft of forced labour in its vast gulag system, and the financial lobby.” the counterfeiting of foreign currency.”49 This has tangible impacts: Luxembourg analyst Luxembourg For Finance, the financial industry’s Jérome Turquey has described: lobbying arm, told TJN in 2011 that that particular report was untrue. “an insulated culture that systematically excludes any information that could The modern ‘captured state’ and its treatment of contradict its reigning picture of reality [...] critics dishonest professionals fail to be pushed out of business, in large part because of As already noted, one of Luxembourg’s key selling Luxembourg’s small size where ‘everybody points for the world’s mobile hot money has long knows everyone else’ – and this creates been Luxembourg’s role as a state ‘captured’ by conflicts of interest.” offshore financial services, which has effectively removed the possibility of democratic opposition The rare internal critics of and challengers to to the sector. While lawmakers are not responsive the offshore financial sector can be dealt with to public pressure, they are extremely responsive to rather harshly. For example, in October 2008 the wishes of offshore finance. As the Luxembourg Arlette Chabot, information director for French Bankers’ Association (ABBL) boasts, one of TV station France 2, had to write a craven apology Luxembourg’s core strengths is “easy access to to Luxembourg after airing a programme (which decision-makers;50 limited red tape” – a testament was admittedly rather short on specifics) critical to the fact that local democratic consultation is of its financial secrecy. In July 2009, when a group generally not allowed to intrude. of non-governmental organisations (NGOs), the Cercle de Coopération, published a report criticising With commuters from across the border making up Luxembourg’s status as a secrecy jurisdiction and nearly 45 per cent of the workforce,51 and foreigners pointing out the conflict with its foreign aid policies, making up over 70 per cent of the working the response was ferocious. Prime Minister Jean- population,52 Luxembourg always had a strong Claude Juncker in a long speech lambasted it as a international orientation, fitting its fast-developing ‘primitive study’ and told the NGOs that they should ‘offshore’ character. refrain from criticising the financial sector; the Cercle was forced to withdraw the study within a This stability for finance has been embedded in week. (The Luxembourg Bankers’ Association cited the dominance of the right-wing political party, ‘inaccuracies’ in the report yet has so far failed to the Chrëschtlesch Sozial Vollekspartei (CSV) which offer correct statistics when challenged to do so; the has strongly supported financial secrecy and the study is available here.) financial centre’s ‘offshore’ orientation –and which has been the largest political party in every Another victim of the Luxembourg financial election from 1919 to nearly the present day. The consensus is Denis Robert, a French journalist whose

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2001 book Revelation$ about the Luxembourg- Banque International a Luxembourg, one of the based clearing house Clearstream, alleging its role country’s biggest banks, and is a director of the in facilitating money-laundering and flows of dirty Luxembourg Stock Exchange – both institutions the money, led to him being subjected to almost sixty CSSF regulates. As the Financial Times summarised: lawsuits in French, Belgian and Luxembourg courts,53 and pursued for years afterwards. “Ms Khabirpour’s multiple jobs showcase the cosy relationships that tie Luxembourg’s The conflict between financial sector governance business community, which centres largely and wider political governance is consistent with on fund management, to its regulators and a pattern common in offshore centres, particularly political leaders.”57 smaller ones, where offshore financial actors can effectively tell the executive and even the judiciary What may be still more striking is that Luxembourg’s how to behave: and for the executive, they are courts seem to have effectively been captured, so happy to do whatever brings revenue – so the that they will side with financial sector players – financial sector actors don’t generally need to exert particularly large financial sector players – against much pressure to get what they want. smaller challengers, whether or not the law says they should. For instance, Luxembourg’s financial regulator, the Commission de Surveillance du Secteur Financier A well-known case here involved the U.S.- (CSSF), is riddled with conflicts of interest. As the based fraudster Bernie Madoff, who built up an IMF politely reported in 2011, international Ponzi scheme and defrauded investors of billions. Insolvency practitioners seeking redress “The current legal framework does not for the defrauded investors have been particularly sufficiently guarantee the full operational coruscating about Luxembourg because of the independence of the CSSF; the CSSF is authorities’ apparent determination to protect placed under the direct authority of the financial sector players at all costs – in violation Minister; its missions include the “orderly of the law. In a series of searing public letters,58 expansion” of Luxembourg’s financial (and here)59 the insolvency practitioners Deminor, center; its general policy and budget are operating on behalf of 2,500 Madoff investors decided by a Board whose members are stated in 2011 that: all appointed by the government upon proposals from supervised entities and the “Our clients and their financial advisors Minister.” have relied on the safeguards in place in Luxembourg, an international financial In early 2016, a new CSSF Director was appointed, centre that openly prides itself as having who just so happened to be a former banker an efficient system aimed at the protection at HSBC Luxembourg and just so happened to of investors [...] . none of these institutions have been involved in a number of offshore deals has been held accountable to date [...] revealed in the Panama papers.54 The outcry in these courts have so far denied access the press and parliament and critical voices in civil to justice to the numerous investors who society did not change the government’s mind followed the CSSF’s advice.” about this appointment.55 A regulatory framework of this nature, focused on the goal of drumming up A May 2013 Financial Times article on the topic as much business as possible, is directly at odds with quoted a fund consultant as saying that regulatory the notion of proper supervision, and it accords with lapses are on the rise in Luxembourg,60 amid fierce the classic offshore offering to capital owners that is competition in laxity with Dublin in particular (see crudely summarised, “we won’t steal your money, more here).61 By 2015, it seemed Luxembourg’s but we will turn a blind eye if you want to steal supreme court denied the right of European someone else’s.” investors to claim damages from Luxembourg- based custodian banks and auditors, apparently in The conflicts of interest are legion. In September violation of the law.62 2013, investor-protection group Protinvest complained to EU Commissioner Michel Barnier, “European investors have been deprived highlighting conflicts of interest, notably the of their rights by the Luxembourg courts to appointment by Finance Minister Luc Frieden of enforce claims derived from EU law, despite his senior adviser Sarah Khabirpour to the board the blatant liability of service providers of the CSSF,56 while she also sits on the board of based in Luxembourg [...] financial

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institutions and other professionals in had helped multinationals from around the world charge knowingly turned a blind eye on the – including IKEA, AIG, Deutsche Bank, Walt Disney risks in order to protect their commercial Co., Pepsi and many other household names – relationships and collect additional fees slash their global tax bills using Luxembourg-based [...] the reality is that more than 6 years structures. These featured ‘tax rulings’ (sometimes after the revelation of the fraud, [none] known as ‘comfort letters’) effectively amounting of these service providers have been held to rubber-stamp authorisation by the Luxembourg accountable by a court in Luxembourg.” tax authorities for highly abusive and complex schemes to channel hundreds of billions of dollars A Luxembourg-based correspondent added these to Luxembourg, in many cases cutting their effective striking words, sent to us by email: tax rates to less than one per cent of the profits that they had shuffled into Luxembourg. Although the “One very important aspect of the cases do not primarily revolve around secrecy, it is Luxembourg financial centre is the telling that the only people to have been penalised absolutely scandalous discrepancy between or incriminated as a result of the exposure of the texts of the law, and their application in these widespread abuses are the whistleblowers everyday judicial life… while international themselves. Their treatment suggests that despite pressure managed to force Luxembourg the policy concessions – detailed below – which to adapt stricter legal constraints to the have emerged perhaps partly as a result of Luxleaks, financial activities under its jurisdiction, Luxembourg is not ready to relinquish its status as a looking into the lack of judicial application secrecy haven. of said constraints becomes even more important. Antoine Deltour, a junior auditor at PwC, Raphaël Halet,68 who worked in the tax department at … PwC scanning and archiving documents relating to Unlike in larger countries, there is no such multinationals’ tax practices, and Edouard Perrin, thing as an independent representation the investigative journalist to whom they passed the of any civil interests in a tiny country like documents, all found themselves on trial. Luxembourg. You just don’t make it in this country unless you’ve proven your Deltour was given a 12-month suspended sentence absolute loyalty to the system in place, and fined 1500 €; Halet was sentenced to 9 months including being ok (if not more) with all of suspended and fined 1000 €. its malpractices.” In March 2017 an appeal judge reduced Deltour’s Meanwhile, the PR outfit for Luxembourg’s financial sentence to six months suspended and removed centre has coined a delightful term for one aspect Halet’s sentence;69 the fines remained. Perrin was of what Tax Justice Network simply calls the acquitted for the second time. Deltour was acquitted finance curse: legislative‘ agility’.63 As a publication of violation of professional secrecy and violation of promoting Luxembourg’s charms as a hedge fund trade secrets, but the court upheld his conviction location neatly summarises,64 this is: ‘a close working for theft offenses, fraudulent maintenance of a relationship between the business community, database, and laundering of acquired data. the Government and the legislature underpins the innovative legal framework of the Grand Duchy.’ The message was fundamentally mixed: Deltour Yes, that pretty much sums up the problem of state was in effect being acquitted of passing the capture. information to a journalist – a recognition ofhis being a whistleblower, while remaining convicted The Luxleaks scandal – and questions about Jean- of obtaining it in the first place. Deltour and Halet Claude Juncker appealed again against their convictions. Deltour’s conviction was quashed inJanuary 2018.70 However, Another huge global scandal, this time almost the court upheld a conviction against his fellow wholly centred on Luxembourg, goes by the leaker, Raphaël Halet. name of “Luxleaks”. 65 This hit the international headlines in November 2014 when Luxembourg- Jean-Claude Juncker, who had recently stepped based whistleblowers exposed a huge trove of down as Prime Minister amid a scandal over the documents,66 which were then publicised by the secret services, roundly denied any involvement International Consortium of Investigative Journalists in Luxleaks. Yet the nature of his denials, and the (ICIJ)67, showing how the accounting giant PwC history of Luxembourg, are instructive.

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A graph of one aspect of this offshore activity points by bureau 6 of the tax authorities may have been not only to Juncker’s role, but also to the history of “questionable” and “should be accompanied by “a Luxembourg’s involvement in offering corporate tax maximum of guarantees” to make sure they did not avoidance services. contradict tax law. “

Juncker himself explicitly denied involvement in However, we should also stress that the tax haven strategy was supported by the entire Luxembourg establishment. As the long-standing representative of that establishment, Juncker certainly carries a significant share of responsibility: but he did not stand alone.

Secrecy in Luxembourg today

Juncker stepped down as Prime Minister in December 2013, and became President of the European Commission the following year. Given his powerful role overseeing the construction of the Luxembourg secrecy jurisdiction there were questions about how he might use his new role. As the Financial Times Source: Gabriel Zucman, 2014; historical details added by David Walch, reported: Attac-Austria. (Note, however, that Bermuda is not in the Caribbean) these activities that led up to Luxleaks: "The appointment [...] has sparked speculation that the Grand Duchy has won “The Luxembourg tax authorities are a powerful protector. Chris Lenon, former very allergic to the idea of ministerial global head of tax at Rio Tinto, the mining interference,” he said. “I think you have group, says: 'This isn’t a poacher turned (an) exaggerated idea of (the) power of the gamekeeper, it looks more like the poacher prime minister in this respect.” in charge of the gamekeepers.'"

This is noteworthy in several respects. First, as But following his departure, Luxembourg began to already explained, the offshore model involves make major strides in improving its record on co- reassuring flighty global capital by effectively operating with other countries including the EU – at ring-fencing the offshore sector against political least in the area of secrecy. How instrumental his interference: Juncker’s words confirm this exactly. departure has been in unlocking these changes is a Second, Juncker’s role was instead to sustain matter of debate, since the Luxleaks scandal a year political support for the offshore model, rather later also had a significant effect, but the timing is than tinkering with its details. And this is confirmed intriguing. by what he said in 2007,71 after single-handedly torpedoing European efforts to tackle these abuses: In our Financial Secrecy Index in 2013 we had described Luxembourg as the “Death Star” of “We have not made ourselves extremely financial secrecy in Europe, on account of its popular in Europe. [...] an essential interest intransigent role in opposing and seeking to of Luxembourg was at stake and therefore undermine European transparency initiatives, as today I had no other possibility than to say described below. The assessment of Luxembourg’s no.” anti-money laundering regime by the Financial Action Task Force in 2010 was devastating: of49 This flatly contradicts his denials of responsibility for assessed criteria, only one was rated as compliant, these abuses, which is also contradicted by a recent nine as largely compliant, 30 as partially compliant, article in Luxembourg’s leading daily newspaper,72 and nine as non-compliant.73 Luxembourg was peer Wort, which reported that Juncker was alerted as reviewed in March 2019 by the OECD’s Global Forum early as 1997 that the special deals being negotiated for the second time74 (after an initial peer review in

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2013, which had reported a litany of problems, and • A particularly worrying development that we ranked Luxembourg as only one of three jurisdictions had flagged in an earlier Luxembourg report that were judged to be noncompliant out of the 81 was the introduction of a Private Foundations that were then assessed). Since then, Luxembourg Law, which would have been a development has overall moved to become “Largely Compliant” of particular concern, creating an important with the international standard for transparency and new way for extremely wealthy people to exchange of information on request. Still, the peer escape scrutiny, tax and regulation. However, review report noted a number of improvements the threatened legislation was withdrawn in that remain necessary and made recommendations December 2014 and as of autumn 2019 has not to the Luxembourg authorities to improve: re-emerged.

1) the availability of beneficial ownership • In January 2017 Luxembourg finally made information on Luxembourg stock companies tax crimes a predicate offence for money- and partnerships laundering79 – as called for by the Financial Action Task Force, which oversees anti-money 2) the application of rights and safeguards of laundering regulations, for many years. In taxpayers theory, this should imply that bankers who accept money they have reason to know to 3) the timeliness of response to exchange of be stemming from foreign tax evasion can be information requests from Luxembourg EOI liable for money laundering (it remains to be partners seen what impact this may have in practice). In a series of moves since Juncker’s departure and • Luxembourg has joined the OECD’s Inclusive Luxleaks, some things have changed rapidly. Framework on BEPS,80 which commits it to implementing the country-by-country • Luxembourg was among the first jurisdictions reporting component of the BEPS action to commit to the OECD’s emerging global plan.81 It has met the OECD requirement;82 standard of information exchange, known as this standard is limited, however, to requiring the Common Reporting Standards. country-by-country reports from a) large • Luxembourg is among 113 jurisdictions that multinationals headquartered in a jurisdiction, have engaged75 with the U.S. Foreign Account and b) domestic branches of subsidiaries of large groups – but only subject to strict OECD Tax Compliance Act (FATCA: see our USA 83 narrative report).76 This is primarily about conditions (see KFSI 9). This is a much lower the U.S. seeking information about its own and less effective level of disclosure than full taxpayers, though with some reciprocity. In public reporting of this information would be. July 2015 Luxembourg’s Intergovernmental A new evaluation on the implementation of the Agreement (IGA – its mechanism to provide Financial Action Task Force (FATF) recommendations US taxpayer information to the US authorities 77 by Luxembourg is also due soon, and should provide under FATCA – came into force). further insight into whether the country abides by • For a long time, Luxembourg was one of two its obligations in the fight against money-laundering recalcitrants (alongside Austria) inside the and combating the financing of terrorism and European Union which refused to sign up to proliferation. the automatic information exchange provisions Meanwhile – and perhaps more importantly, given of the EU’s Savings Tax Directive (EU-STD). the limitations of the BEPS standard on country- Worse, it played the biggest blocking role when by-country reporting – there has been increased the European Commission was trying to push scrutiny by the EC of Luxembourg’s cosy tax through powerful amendments to tighten arrangements with multinationals. Investigations up on loopholes and expand its scope. This have included Amazon, McDonalds, Fiat, and the position changed inMarch 2014 when all 28 EU French utility company Engie; in its most recent member states signed up to the amendments,78 ruling the EC ordered Luxembourg to recover 250 after Luxembourg and Austria finally dropped million euros in taxes from Amazon, finding that their opposition. (However, the EU STD was the benefits extended to the company amounted repealed in November 2015, to be replaced to illegal state aid.84 In late September 2019, the by the Common Reporting Standard, which is EU Court of Justice ordered Fiat Chrysler to pay implemented in the EU through the Directive back about $33M in taxes to the Luxembourg state on Administrative Cooperation, or DAC.)

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that had previously been saved under a sweetheart Over the last five years, a number of newspapers deal. Such moves may be making the country a less and magazines increased their coverage of the attractive low tax destination; McDonalds jumped financial sector with greater depth and an ever ship to the UK at the end of 2016.85 Given the more critical perspective: the Woxx,90 an alternative uncertainty around Brexit, however, a number of weekly linked to the Green Party; the Lëtzebuerg companies have been leaving the UK and some have Land,91 an independent weekly covering politics, migrated to Luxembourg in 2019. economics, and culture, or Forum,92 a multi-lingual independent monthly magazine dedicated to socio- On 1 March 2019, the Law of 13 January 2019 political issues. establishing a Register of Beneficial Owners came into force and as a consequence, the previous At the end of 2017, a new digital investigative Register of Businesses and Corporations was reporting magazine called reporter.lu was launched transformed into the one-stop shop Luxembourg via crowdfunding and remains to this day entirely Business Registers.86 However, the implementation subscription-funded,93 so as to be independent both of the law – which inter alia seeks to transpose the from state media subsidies and advertising revenue. EU’s 4th AML Directive (EU) 2015/84 into national It has three co-editors and four additional reporters legislation, has been criticised, notably also because on staff, who together put out regular investigative non-profit associations have been required to stories, many of them casting light on various register as though they were businesses. aspects of Luxembourg’s financial sector, as well as global financial scandals. But the changes haven’t just been in financial policy. The tone of public debate has started to shift too, This rise in critical press coverage has come which, given the web of connections and silent alongside artistic expressions of popular and complicity that maintains the ‘finance curse’ in small intellectual resistance to the finance curse, such secrecy jurisdictions, could become significant. as the independent arts collective “Richtung 22”,94 which gives young Luxembourgish actors a platform Shortly after Luxleaks broke, two Luxembourgish to merrily and mercilessly lampoon the finance citizens, Luc Dockendorf and Benoît Majerus, industry, political corruption, and hypocrisy. launched an appeal “For a new social contract for Luxembourg”. 87 In an op-ed published in Updated with the help of the Collectif Tax Justice Luxembourg’s largest daily newspaper in November Lëtzebuerg95 2014, they argued that the time had come to urgently rethink Luxembourg’s economic and social Secrecy and human rights model, which required recognising that the offshore financial model was neither morally acceptable, not A number of encouraging developments could be economically sustainable in the long term. observed over the last reporting period in the field of human rights compliance in the Grand-Duchy of Then in January 2016, the “Collectif Tax Justice Luxembourg, which however require close follow- Lëtzebuerg”88 was launched as a civil society up in order to lead to more structural changes. platform for a ‘free, open, and constructive debate on offshore finance’. A Solidarity Committee CEDAW supporting the LuxLeaks whistleblowers facing trial was also founded,89 organising protests at the trial One interesting development has been the and publishing articles calling for the recognition increasing scrutiny of the legal and moral legitimacy of their public service. (A draft law on the status of of tax policies which uphold and support financial whistleblowers has yet to reach Parliament.) secrecy. One avenue through which this has been pursued is the Convention on the Elimination of All Another positive outcome of the Luxleaks scandal Forms of Discrimination Against Women (CEDAW)96 has been a shift in the media attitude. Until 2014, the - the United Nations’ international ‘Bill of Rights’ for media was rarely critical, but the LuxLeaks revelations women and girls. and the subsequent trial of its whistleblowers have changed this. A cadre of – mostly young – On 1 March 2018, the CEDAW Committee considered journalists across different newspapers and media the combined sixth and seventh periodic reports of groups has emerged to criticise the treatment of Luxembourg (CEDAW/C/LUX/6-7).97 At this session the whistleblowers and to shatter the taboo around the Luxembourg Government provided a State Party reporting on offshore finance. report to the Committee on their progress towards implementing CEDAW and the recommendations

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made by the CEDAW Committee in previous years. Luxembourg had conducted an extensive baseline In its recommendations, the Committee expressed study of the business and human rights landscape concern “that the State party’s financial secrecy in Luxembourg. Hopefully the next iteration of the policies, its corporate reporting and taxation national action plan will address more fully the practices and its incentives for companies registered concerns flagged up by CEDAW. in Luxembourg and operating abroad have a severe impact on the ability of other States, in particular An Initiative for Due Diligence in Luxembourg those already short of revenue, to mobilize the was launched by 16 Luxembourg NGOs in March maximum available resources for the realization 2018 in order to convince transnational business of women’s rights.” The Committee reminded enterprises headquartered in Luxembourg to take Luxembourg “about its responsibility for actions full responsibility for extraterritorial activities in affecting the advancement of women and their their value chains which might threaten human human rights, irrespective of whether or not the rights and the environment:98 a major success of this affected persons are under the jurisdiction of the initiative was the inclusion of a commitment in this State party.” and recommended that Luxembourg: regard in the coalition programme of the second Bettel government which took office in late 2018. a) Adopt a national action plan on business and human rights on the basis of the Guiding Open Government Partnership Principles on Business and Human Rights: Implementing the United Nations “Protect, Luxembourg adopted its firstNational Action Plan in Respect and Remedy” Framework and in the context of the Open Government Partnership in consultation with civil society organizations in summer 2019,99 including a commitment to deepen the State party; the implementation of the Law of 14 September 2018 on Transparent and Open Administration, as b) Expedite the establishment of the inter- well as the creation of a national platform – co-led ministerial monitoring committee and allocate by government and civil society – to support the adequate human, technical and financial protection of human rights defenders worldwide. resources for its effective functioning and for In his preface to the action plan, the Prime Minister the implementation of the national action plan underscores the importance of greater civic on business and human rights; participation and the horizontal implementation of the highest standards of professional integrity in the c) Undertake independent, participatory civil service. and periodic impact assessments of the extraterritorial effects of its financial All of these developments will need to be followed secrecy and corporate tax policies and its closely if they are to lead to deeper changes in commercial activities on women’s rights and Luxembourg’s polity, economy, and society: at the on the substantive equality of women and moment, they appear still too fragmented and men in affected States, ensuring that those often an afterthought when compared to the more assessments are conducted impartially, with glamorous efforts deployed in support of economic public disclosure of both the methodology diversification. used and the subsequent findings, and further reviewing its corporate and financial With thanks to Tax Justice Lëtzebuerg legislation, policies and practices with a view to fully realizing the enjoyment by women of their rights under the Convention, both domestically and abroad.

Business and Human Rights

In 2018 the government adopted a national action plan on business and human rights which was developed in association with a multi-stakeholder group including civil society, but the plan was superficial as far as financial secrecy is concerned. At the time of writing, a second national action plan was in preparation, after an independent post-doctoral researcher from the University of

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